The Green Sheet Online Edition

The time has come. As ISOs and merchant level salespeople (MLSs), you've grown your portfolios after many years of toil and persistence. Your merchants are happy. The residuals are flowing in.

But you've maxed out. You know it's time to sell those portfolios and reap the benefits of all your hard work.

But what do you do now? How do you actually go about selling those portfolios? What many ISOs and MLSs don't know is that a variety of choices need to be made in order to make those sells.

Price

Many variables go into determining the price of a given portfolio. They include:

Type of merchants in the portfolio

How many merchants have left the portfolio (attrition)

Average ticket size

Degree to which merchants are interrelated

Concentration of large merchants

Age of portfolio

Type of platform

Portability of portfolio under MLS / ISO agreement

Portfolio prices will vary according to whether sellers become sales agents for buyers. Buyers like sellers to become agents as a way to mitigate the risk of dishonest sellers who move merchants out of portfolios they have already sold.

Payout structure will also affect portfolio selling prices. For example, if the entire purchase price is paid in one lump sum at closing, that price is likely to be lower than if the price is paid in installments over time.

Another price-determining factor is seller patience: Some sellers are willing to wait for a very long time until they can sell their portfolios at particular prices; other sellers are not as fussy and are willing to settle now for lower prices.

The moral of all pricing stories is to shop around to get the best deals.

All or part

For one reason or another, sellers may wish to sell only parts of their portfolios, though many buyers will be reluctant to purchase portfolio pieces.

Sellers often want to retain a subset of their portfolios - perhaps those merchants that offer the healthiest residuals and require low maintenance, or those with whom they have developed close personal relationships.

The decision over what parts of portfolios sellers may wish to keep should be made well in advance of putting portfolios on the market. Sellers should keep in mind that cherry picking certain merchants to keep for themselves will reduce buyer interest.

With or without service

Some buyers want sellers to continue servicing portfolios after they are sold. Sellers should beware of this demand.

If you're going to continue servicing portfolios that have already been sold, why not continue earning full residuals on them?

Remaining parties to agent agreements

Some buyers will neither want to enter into agreements with entities paying residuals to ISOs or MLSs, nor become assignees of ISO agreements. As such, sellers will legally remain agents of record in respect to portfolios.

In the event liability arises under such residual agreements, sellers remain the first parties responsible for liability, even though they may have already sold the underlying residuals to third parties.

This is a complicated scenario. Once a given seller has paid a liability, the seller must collect the liability amount from the entity that purchased the portfolio.

One piece of leverage for sellers is to withhold the forwarding of residuals to buyers until such time as liabilities have been satisfied.

Another complication in this type of situation is that it might not be clear who is responsible for the various obligations under existing agreements with their entities paying residuals.

Consequently, regardless of the structure of buyout agreements, it should be very clear from the terms of the agreements who carries what responsibilities going forward.

Allocation of liability

As a general principle, as soon as transactions involving portfolio sales have closed, buyers should assume whatever liabilities sellers had in respect to portfolios.

If buyers assume only some of the liabilities, the parties are increasing their chances of disputes should liability issues arise in the future.

It is not uncommon for no-liability deals to turn into liability deals, or vice versa, in buyout scenarios.

Obviously, buyers have to go through the underwriting process with the entities that pay residuals to ensure those entities assume all the obligations and rights sellers once had in respect to portfolios.

Consent

It is always advisable to obtain consent of the entities that pay sellers their residuals prior to closing transactions that involve the sale of portfolio rights.

Without that consent, buyers cannot be certain they are getting what they paid for.

Some ISO and MLS agreements give broad rights of assignment to ISOs and agents, but these agreements are rare. From buyers' viewpoints, consent can take one of two forms.

It could simply be consent for the sellers to assign their rights in residuals to buyers.

It could be consent for sellers to assign all of their rights and obligations under the main sales agreements to buyers.

While obtaining consent is usually necessary to close buyout transactions, it's not wise to bother entities paying sellers their residuals if sellers back out of portfolio sales at the last minute.

Processors that pay residuals need to have total confidence in ISOs and MLSs. To the extent that sellers involve these residual payers in portfolio sale strategies, processors may interpret such involvements as evidence that ISOs and MLSs are losing focus on their core obligation to bring in new merchants and service existing portfolios.

Exit strategy

Portfolio sales can be complicated. ISOs and MLSs must do their homework ahead of time, just as vacationers map out travel itineraries to new places to get to where they want to be. There are many ways to get there and many exits that lead to the same destination.

In publishing The Green Sheet, neither the author nor the publisher is engaged in rendering legal, accounting, or other professional services. If you require legal advice or other expert assistance, seek the services of a competent professional. For further information on this article, e-mail Adam Atlas, Attorney at Law, at atlas@adamatlas.com or call him at 514-842-0886.

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